Academies: Why internal audit is important

Published by Peter Manser on 5 June 2019

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Lord Agnew is a firm believer that the recent Academy Trust scandals to hit the headlines are primarily down to poor governance and oversight. The internal audit function is a key process in ensuring oversight and therefore should be seen as a process that supports finance teams, trustees and can add value to an Academy Trust.

The Academies Financial Handbook (AFH) clearly states that a robust control framework is required and it must include the independent checking of financial controls, systems, transactions and risks. The oversight of this process lies with a committee appointed by the board of trustees (either a separate audit committee or a committee with responsibility in this area e.g. finance), and the purpose of the committee is to ensure that risks are managed and that the financial systems and controls are appropriate and rigorously enforced.

The most common solution is for Academy Trusts is to appoint an internal audit service which carries out a programme of work – something Kreston Reeves perform for many Trusts. The key to this arrangement though is to ensure the relationship is between the committee and the internal auditor in terms of developing a programme of work and reporting back the findings. Too often the relationship is left to the Chief Financial Officer (CFO) and the internal auditor – this is not good governance for obvious reasons.

Trusts should also be clear that the internal audit function should not be limited to financial controls, systems and transactions. It is crucial that the audit committee plays a full role in identifying risk areas and deciding upon the areas of focus for the internal auditor, for example, there may be specific areas where the committee would like assurance, such as the authorising of expense claims or the process to identify related parties. Away from finance a typical area for review might be health and safety. Although your financial advisers are unlikely to have the expertise to review this area, it is still one that should be considered by the audit committee and perhaps another third party can undertake a review on your behalf? Or if a review is already performed, is the report shared with the audit committee?

The internal audit function should be a rolling programme with some new areas being reviewed and some areas being checked on a rotating basis. The key point is that the internal audit should provide added-value to the trust in the emergence of positive recommendations and, possibly, an early warning system where controls are weak or absent. The CFO should certainly not see this as a criticism of their role, but more of a helpful watchdog.

As mentioned at the start of this article, Lord Agnew is a believer that a robust internal audit function alongside strong governance can help prevent major issues arising. Therefore it may come as no surprise that the ESFA are considering requesting to see a summary of each Trust’s internal audit function for the past academic year – with the summary to be submitted alongside the year end financial statements. This should act as a warning for Trust’s whose internal function could do with being revisited to ensure it is more robust and performing the role they expect.

If upon reading this article you feel that your internal audit function could do with a refresh then please do get in contact with one of the Kreston Reeves’ academy team who will be happy to help.

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